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Chapter 6
Nora Aldawood
Page 1
Accounting for Merchandising Businesses
LearningObjective1Distinguish between the activities and financial statements of
service and merchandising businesses.
Nature of Merchandising Businesses
Service BusinessProvide services rather than products to customers.
Merchandising BusinessSell products they purchase from other business to customers.
Manufacturing BusinessChange basic input in to products that are sold to customers.
LearningObjective2Describeand illustrate the financial statements of a
merchandising business.
Sales is the total amount charged to customers for merchandise sold, including cash
sales and sales on account.
Sales returns and allowances are granted by the seller to customers for damaged or
defective merchandise.
Trade Discount is granted by the seller to government agencies or business that order large quantities.
Sales discounts are granted by the seller to customers for early payment of amounts
owed.
purchase return The buyer may return damaged or defective merchandise to the
seller.
purchase discounts Sellers may offer customers sales discounts for early payment of
their bills.
From the buyer’s perspective, such discounts are referred to as.
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LearningObjective3Describeand illustrate the accounting for merchandising transactions
including: sale of merchandise; purchase of merchandise; freight; sales taxes and trade
discounts; dual nature of merchandising transactions.
On January 3, Net Solutions sold$1,800 of merchandise for cash.
The cost of merchandise sold and the decrease in merchandise inventory are also
recorded. The cost of merchandise sold on January 3 is$1,200.
On January 12, Net Solutions sold merchandise on account for $510. The cost of
merchandise sold was$280.
Date Description Debit Credit
Jan.3 Cash Sales
1,800
1,800
Jan.3 Cost of merchandise sold Merchandise inventory
1,200
1,200
Jan.12 Account receivable Sales
510
510
Jan.12 Cost of merchandise sold Merchandise inventory
280
280
Sales Discounts
The terms for when payments for merchandise are to be made are called credit
terms.
If payment is required on delivery, the terms are cash or net cash. Otherwise, the
buyer is allowed an amount of time, known as the credit period, in which to pay.
Credit Terms
To encourage the buyer to pay before the end of the credit period, the seller may offer
adiscount,suchas2/10,n/30.These terms indicate that a two percent discount can be
taken if the invoice is paid within ten days.
After ten days the full amount is due by the thirtieth day from the invoice date.
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Receipts on Account
On January 7, Net solutions sold merchandise on account $1,500 to Kool Co.
terms2/10, n/30. The cost of merchandise sold is$400.
On January 17, Net Solutions receives the amount due within ten days, so the buyer deducted
$30($1,500x2%) from the invoice amount.
Date Description Debit Credit
Jan.7 Accounts Receivable
Sales
1,500
1,500
Jan.7 Cost of Merchandise sold
Merchandise inventory
400
400
Jan.17 Cash
Sales discounts
Account receivable
1,470
30
1,500
Credit Memo(sales Retunes and allowance):
Merchandise sold may be returned to the seller ( sales return) . in other cases ,the seller may reduce the initial selling price ( sales allowance ) .this might occur if the merchandise is defective , damaged during shipment or does not meet the buyer’s expectations If the returns or allowance is for sale on account the seller usually issues the buyer A credit memorandum, often called a credit memo, authorizes a credit to (decreases)
the buyer’s account receivable.
On January 13,Net solution issued Credit Memo No.32 to Krier Company for
merchandise returned.
Selling price, $225;cost to Net Solutions,$140.
Date Description Debit Credit
Jan.13 Sales returns and allowances Account receivable– Krier Co.
225
225
Jan.13 Merchandise inventory
Cost of merchandise sold
140
140
Purchase Transactions
On January 3, Net Solutions purchased merchandise for cash.
On January 4, Net Solutions purchased merchandise on account from Thomas Corporation. Date Description Debit Credit
Jan.3 Merchandise inventory
Cash
2,510
2,510
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Jan.4 Merchandise inventory Account payable-Thomas Corporation
9,250
9,250
Purchases Discounts
A buyer may receive a discount from the seller (sales discount) for early payment of
the amount owed.
From the buyer’s perspective, such discounts are called purchases discounts.
Alpha Technologies issued an invoice for $3,000 to Net Solutions dated March12,with
terms 2/10,n/30.
Date Description Debit Credit
Mar. 12 Merchandise inventory
Account payable-Alpha Technologies
3,000
3,000
March22, Net Solutions pays the amount due, less the discount, on March22.
Date Description Debit Credit
Mar. 22 Account payable-Alpha Technologies Cash
Merchandise Inventory
3,000
2,940
60
Discount Not Taken
Assume that, instead of paying the invoice within the discount period, Net Solutions pays
the invoice on April11.
Date Description Debit Credit
Apr.11 Account payable-Alpha Technologies Cash
3,000
3,000
Purchases Returns and Allowances
A purchases return involves actually return in merchandise that is damaged or does not
meet the specifications of the order.
From a buyer’s perspective, such returns are called purchases returns and allowances.
A debit memorandum, often called a debit memo, informs the seller of the amount
the buyer proposes to debit to the account payable due the seller.
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Debit Memo
Net Solutions receives a delivery from Maxim Systems and determines that $900 of the
items are not the merchandise ordered.
Debit memorandum#18 is issued to Maxim Systems.
Net Solutions records the return of the merchandise as follows:
Date Description Debit Credit
Mar.7 Account payable-Maxim Systems
Merchandise inventory
900
900
Merchandise Purchased
On May2, Net Solutions purchased $5,000 of merchandise on account from Delta Data Link,
terms 2/10,n/30.
On May4, Net Solutions returned $3,000 of the merchandise purchased from Delta Data
Link.
Date Description Debit Credit
May.2 Merchandise inventory Account payable-Delta Data Link
5,000
5,000
May.4 Account payable-Delta Data Link Merchandise inventory
3,000
3,000
Invoice Paid
On May12,Net Solutions paid for the purchase of May 2 less the return and discount.
Date Description Debit Credit
May. 12 Account payable-Delta Data Link Cash Merchandise inventory
2,000
1,960
40
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Freight
Purchases and sales of merchandise ofter involves freight the terms of a sale indicate when
ownership of the merchandise passes from the seller to the buyer , this point determines
whether the buyer or the seller pays the freight costs : If ownership of the merchandise passes to the buyer when the seller delivers the
merchandise to the freight carrier, the terms are said to be FOB(free on board)
shipping point.
If ownership of the merchandise passes to the buyer when the buyer receives the
merchandise, the terms are said to be FOB(free on board) destination.
On June10, Net Solutions buys merchandise from Magna Data on account,$900,terms
FOB shipping point and pays the shipping cost of$50.
Date Description Debit Credit
June.10 Merchandise inventory Account payable-Magna Data
900
900
Jan.10 Merchandise inventory
Cash
50
50
Sale Plus Freight Cost
On June15, Net Solutions sells merchandise to Kranz Company on account,$700,terms FOB
destination. Thecostofthemerchandisesoldis$480.
On June15, NetSolutionspaysfreightof$40on the saleofJune15.
Date Description Debit Credit
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June.15 Account receivable-Kranz Company Sales
700
700
Jun.15 Cost of Merchandise Sold
Merchandise inventory
480
480
June.15 Delivery expense Cash
40
40
Trade Discounts
When wholesalers offer special discounts to certain classes of buyers who order large
quantities, these discounts are called trade discounts.
Financial Statements for a Merchandising Business:
Multiple-step Income statementmanes the INCOME STATEMENT contains several sections, subsections and subtotals.
Revenue and Sales Sales, Sales returns and allowances and sales discounts. Net Sales is determined by subtracting Sales returns and allowances and Sales discounts from Sales.
Net Sales=Sales-(Sales returns and allowances +Sales discounts) Cost of Merchandising Soldis the cost of merchandising sold to customers, merchandise consist of all the costs acquiring the merchandise and readying it sales, such as purchase and freight cost.
Cost of Merchandising Sold =Inventory1/1 +Cost of Purchases- Inventory13/12
Cost of Purchases=Purchases-Purchases returns and allowances-Purchasesdiscounts
Gross Profit is computed subtraction the cost of merchandise from net sales.
Gross Profit= Net Sales- Cost of Merchandising Sold
Income from Operationis determined by subtracting operation expenses (sales
expenses, administrative expense) from gross profit.
Income from Operation= Gross Profit- Expenses
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Other Income and ExpenseItems are not related to the primary operation of the
business. For examples interest revenues and interest expenses.
Net income = Income from Operation+ Other Income-Other expenses.
Net Solutions
Income Statement
For the Year Ended December 31,2007
Revenue from sales:
Sales $720.185
Less: Sales returns and allowances $6.140
Sales discounts 5.790 11.930
Net sales $708.255
Cost of merchandise sold 525.305
Gross profit $182.950
Operiting expenses:
Selling expenses:
Sales salareis expenses 56.230
Advertising expenses 10.860
Depr. Expenses-store equipment 3.100
Miscellouns selling expenses 630
Total selling expenses $70.820
Administrative expenses:
Office saleries expenses 21.020
Rent expenses 8.100
Depr. Expenses-office equipment 2.490
Insurance expenses 1.910
Office supplies expenses 610
Miscellouns administrative expenses 760
Total administrative expenses 34.890
Total operiting expenses 105.710
Income from operation $77.240
Other income and expenses:
Rent revune 600
Interest expenses (2.440) (1.840)
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Net income $75.400
Step Income Statementsfrom emphasizes total revenues and total expenses are
determining net income.
Net Solutions
Income Statement
For the year Ended December 31, 2007
Revenues:
Net sales 7708.225
Rent revenue 600
Total revenues 708.855
Expenses:
Cost of merchandise sold 525,305
Selling expenses 70,820
Administrative expenses 34,890
Interest expense 2,440
Total expenses 633,455
Net income 75,400
Net Solutions
Statement of owner's equity
For the year Ended December 31, 2007
Chris Clark, Capital 1/1/2007 153,800
Net income for year 75,400
Less: withdrawals 18,000
Increase in Owner's equity 57,400
Chris Clark, Capital 12/31/2007 211,200
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Net Solutions
Statement of financial position
For the year Ended December 31, 2007
Assets
Current Assets:
Cash 52,950
Account receivable 91,080
Merchandise inventory 62,150
Office supplies 480
Prepaid insurance 2,650
Total current assets 209,310
Property, plant, and equipment:
Land 20,000
Store equipment 27,100
Less accumulated depreciation 5,700
Net Store equipment 21.400
Office equipment 15,570
Less accumulated depreciation 4,720
Net Office equipment 10,850
Total Property, plant, and equipment 52,250
Total Assets 261,560
Liabilities
Current Liabilities:
Account payable 22,420
Note payable (Current portion) 5,000
Salaries payable 1,140
Unearned rent 1,800
Total Current Liabilities 30,360
Long-term Liabilities:
Note payable (Due 2017) 20,000
Total Long-term Liabilities 20,000
Owner's equity
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Chris Clark, Capital 211,200
Total Owner's equity 211,200
Total Liabilities and Owner's equity 261,560
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Sales Transactions Cash Sales Sales on Account
Cash xxx
Sales xxx
Account receivable xxx
Sales xxx Cost of merchandise sold
Cost of merchandise sold xxx
Merchandise inventory xxx
No Sales discount Sales Discounts (Receipts on Account)
Cash xxx
Sales Discounts xxx
Account Receivables xxx
Sales Returns and allowances Sales Returns and allowances xxx
Cash xxx
Sales Returns and allowances xxx
Account Receivables xxx
Merchandise Inventory xxx
Cost of merchandise sold xxx
Purchase Transactions
Cash Purchase Purchased on Account
Merchandise Inventory xxx
Cash xxx
Merchandise Inventory xxx
Account Payable xxx No Cash Discount Purchases Discounts
Account payable xxx
Cash xxx
Merchandise inventory xxx Discount Not Taken Account payable xxx
Cash xxx
Purchases Returns and Allowances Account payable xxx
Cash xxx
Account payable xxx
Merchandise inventory xxx
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Net Sales=Sales-(Sales returns and allowances +Sales discounts) Cost of Merchandising Sold =Inventory1/1 +Cost of Purchases- Inventory13/12
Cost of Purchases=Purchases-Purchases returns and allowances-Purchasesdiscounts
Gross Profit= Net Sales- Cost of Merchandising Sold
Income from Operation= Gross Profit- Expenses
Net income = Income from Operation+ Other Income-Other expenses.